"The underlying growth trend is showing some encouraging signs, but the key risk is how much fiscal tightening we'll see this year," said Laura Rosner, economist at BNP Paribas in New York.

While jobless claims increased more than expected last week, they have trended lower this year and remain near five-year lows. Last week, initial claims for state unemployment benefits increased 16,000 to a seasonally adjusted 357,000, the Labor Department said.

The four-week moving average for new claims, a better measure of labor market trends, rose 2,250 to 343,000.

Still, for many economists a trend reading below 350,000 level points to a firm pace of hiring in March.

"The improvement in the underlying pace of layoffs during the first three months of 2013 has been meaningful," RBS analysts said in a note to clients.

A drop in layoffs doesn't necessarily signal an increase in the pace of hiring, but Gennadiy Goldberg, an analyst at TD Securities in New York, said the trend in claims was consistent with employers adding about 195,000 workers to their payrolls in March.

That would be a slower pace of hiring than during February but still suggestive of a labor market recovery that is taking hold. The U.S. government's estimate of job growth for March - known as the non-farm payrolls report - is scheduled for release on April 5.

Despite an acceleration in hiring since mid-2012, the Federal Reserve has appeared worried that budget tightening by the government could dampen progress in the labor market. Last week, the Fed's policymakers renewed a pledge to keep buying bonds at a monthly pace of $85 billion until the labor market outlook improved substantially.

Recent data has shown the economy gathering strength. Retail sales have been stronger than expected, manufacturing output has picked up and employment growth has quickened, with the jobless rate dropping to 7.7 percent in February from 7.9 percent in January.

A report on business activity in the U.S. Midwest ran counter to this trend, with the Institute for Supply Management-Chicago business index falling to 52.4 in March. That was below analysts' expectations and pointed to slower growth.

A BIT MORE GROWTH

The U.S. Commerce Department said it increased its estimate of fourth-quarter economic growth because of a big gain in business investment and higher exports of services.

The 0.4 percent growth rate, which was the slowest since the first quarter of 2011 and far from what is needed to fuel a faster drop in the unemployment rate, was just below the 0.5 percent gain forecast by analysts in a Reuters poll.

Much of the weakness came from a slowdown in inventory accumulation and a sharp drop in military spending. These factors are expected to reverse in the first quarter, when many economists see an economic growth rate closer to 3 percent.

The fourth-quarter rate was, however, higher than the government's previous estimate of a 0.1 percent gain. Compared with the overall economy, consumer spending growth looked a little more robust, expanding at a 1.8 percent annual rate.

Thursday's report is the government's third estimate of growth for the final three months of 2012. In the first estimate, the government shocked economists by saying the economy shrank at a 0.1 percent annual rate.

The reasons for the meager pace of economic activity were mostly as initially estimated.

Inventories subtracted 1.52 percentage points from the GDP growth rate in the fourth quarter, a bit less of a drag than in the second GDP estimate, which was published on Feb. 28. Defense spending plunged at a 22.1 percent rate, shaving 1.28 points off growth as in the previous estimate.

There were some bright spots in the fourth quarter, however. The report showed business investment rose at a 13.2 percent rate, a bigger gain than initially estimated. The extra growth was mostly from more construction spending by businesses.

The number of Americans filing new claims for unemployment benefits rose last week, but not enough to suggest the labor market recovery was taking a step back.Other data on Thursday showed the economy expanded at an annual rate of 0.4 percent in the fourth quarter, more...